7 Smart Ways to Use Your Tax Refund

A tax refund is a one-time payment you may receive after filing your federal income tax return if you overpaid taxes during the year. Because it is not recurring income, refunds are often allocated toward financial priorities such as emergency savings, debt repayment, or longer-term savings goals.

Key points

• Building or topping up an emergency fund could be an effective way to use a tax refund.
• You can use your refund to pay down high-interest debt or contribute to retirement and health savings accounts.
• Other smart uses include saving for education, investing, or setting money aside for future taxes if you’re self-employed.

Understanding tax refund variations

For the 2024 tax year (filed in 2025), the average tax refund as of May 9, 2025 was $2,939. For all of 2024, the average refund was $3,138.^[1]

7 smart ways to use your tax refund

If you're expecting a refund this tax season, it's important to spend it wisely. Here are seven smart ways to put your tax refund to good use:

1. Create an emergency fund

If you don't already have an emergency fund, it's a good idea to build one so you have at least three to six months' of living expenses tucked away. It's important to have emergency savings before focusing on your other money priorities or before paying off your debt at full throttle.

That's because if you don't have a cash cushion, you could easily find yourself racking up more debt during lean times or if an unexpected expense pops up.

2. Direct it to a savings account

Want to fatten your sinking funds? Save for a summer vacation? Or toward a down payment on a house? You can use that tax refund to make steady progress on your savings goals.

If you signed up for a direct deposit for your tax refund, you can split up your refund into up to three financial accounts. These can be a savings or checking account, a health savings account, an education account, or even certain retirement accounts. ^[1]

3. Pay off debt

If your emergency fund is in a good place, Cole suggests using what's left over to pay down credit card and other high-interest debt. High-interest debt can be very expensive, so if you are able to, pay it off as soon as you can.

This might be a tall order, especially if you're feeling financially stretched. But putting at least a portion of your tax refund toward your credit card or personal loan payments can make a big difference.

4. Fun your retirement or HSA

For 2025, you can contribute up to $7,000 to an IRA ($8,000 if you're 50 or older).^[3]

If you have a high-deductible health plan (HDHP) and have an HSA, you can contribute up to $4,300 for individual coverage and $8,550 for family coverage in 2025. For 2026, these limits increase to $4,400 for individual coverage and $8,750 for family coverage. If you're 55 or older, you can contribute an additional $1,000 catch-up contribution. In order to contribute to an HSA, you have to be enrolled in an HSA-eligible health plan.^[4]

5. Put it toward an education fund for yourself or your kids

If your kids are planning to go to college, or you'd like to go back to school, save part of your tax refund toward an education fund.

One option to consider is to open a 529 savings account for you or your kids. These state-administered plans are designed to help you save for future eligible education costs. While 529 plans aren't tax-deferred, they grow federally tax-free.

And depending on where you live, you might be able to scoop up tax savings at the state level. You'll need to use funds from a 529 savings account for qualified educational expenses, so be sure to read the fine print and understand the rules. While there are tax perks to 529 savings accounts, they are investments, so be sure to understand the risk in contributing to such an account.

6. Invest it

Investing might be one of those things at the top of your mind, but end up sinking to the bottom of your financial to-do list. You may consider investing in the stock market.

Micro-investing platforms and discount brokerages make it easy to get started. Often, you only need a few dollars to begin investing. If you're new to the world of investing, it's a good idea to consult with a financial advisor before getting started.

7. Cover future tax expenses

If you're a gig economy worker or have various side hustles, and expect to owe taxes for the current year, you can choose to roll over your refund into a savings account to pay for future tax liabilities.

Sources

1. IRS. "Filing season statistics for week ending May 9, 2025," https://www.irs.gov/newsroom/filing-season-statistics-by-year. Accessed October 22, 2025.
2. IRS. "Frequently Asked Questions About Splitting Federal Income Tax Refunds," https://www.irs.gov/refunds/frequently-asked-questions-about-splitting-federal-income-tax-refunds. Accessed October 22, 2025.
3. IRS. "401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000," https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000. Accessed October 22, 2025.
4. Fidelity. "HSA contribution limits 2025 and 2026," https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits. Accessed October 22, 2025.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes, Salon.com, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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